India growth story strong, say fund managers

MUMBAI: India, the world's second-fastest growing economy, could further accelerate its pace if political governance improves and adequate investments are made in agriculture and education to unlock the demographic dividend New Delhi will enjoy over Beijing in the next two decades, participants at an investor forum said on Wednesday.

'Chasing sustainable growth' was the hot topic of discussion at the investor forum organised by Kotak Institutional Equities where more than 450 fund managers and asset allocators caught up with 100 company managements. Blue chips, such as engineering and construction giant Larsen & Toubro, the diversified Godrej Group and Coal India, are participating in the three-day event being held in Mumbai.

"The economy is doing very well," Adi Godrej, chairman of the Godrej Group, said. "If transparency improves, we may see growth accelerating to 9% in the next fiscal year, I am very confident."

India's $1.3-trillion GDP is forecast to expand 8.6%, thanks to robust demand for everything from cars to toothpaste. But red-hot growth is at risk as the Reserve Bank of India raises interest rates to curtail runaway food inflation that has averaged more than 15% since 2009. As a consequence, the benchmark index, Sensex, has plunged 14% so far in 2011 on fears of a further rise in borrowing costs and after a series of scams that have dented the government's credibility. Sanjeev Prasad, executive director and co-head at Kotak Institutional Equities, "weak governance'' could be partly blamed for the fall in stock prices since January.

"Growth can be stronger if governance improves significantly followed by large investments in hard and soft infrastructure such as health and education," he said.

These two sectors account for less than 10% percent of government spending, but much more needs to be done for the 240 million Indians aged between of 10 and 19, who will enter the workforce in the next 10 years. "The confidence that the rest of the world has in India's future has never been higher," Narendra Jadhav, a Planning Commission member, told fund managers. "But there is a crying need for a metamorphic change in skills development and social infrastructure if this demographic dividend has to be harnessed."

Meanwhile, most fund managers at the event said major companies were priced reasonably post the correction but higher domestic inflation, firm commodity prices and the re-emergence of growth in western economies was sapping local sentiment. Conviction in equities will return after inflation is controlled and there is consensus that earnings growth will be around 16-20% for fiscal 2012, they said. "There is pain for 4-5 months and at some point of time value will re-emerge in stocks," Prasad said. "But the confidence will not return unless there is a change in governance and the government takes concrete steps to cut down subsidies." Prasad expects buying to surface at 17,000-levels on the Sensex and finds value in some public sector lenders such as Bank of Baroda.

The Sensex hit a seven-month low and closed at 17,593 points on Wednesday.